The role of financial
institutions in modern society is to provide financing and capital to meet the
needs of individuals, companies and society, and ultimately provide the support
for an efficient functioning economy and to facilitate sustainable growth and
prosperity.

Financial institutions
face a series of impediments that inhibit capital from flowing to where it is
most needed. Indeed, the world is awash in financial capital: corporate balance
sheets are at an all-time high, consumers are deleveraging and money is
clustered in large institutional pools. And yet, it is not finding its way to
SMEs, upstart entrepreneurs and underbanked individuals, where the
opportunities for sustainable economic growth are perhaps the greatest. There is
an acute mismatch between the suppliers of capital (who are mostly very large)
and the demanders of capital (who are mostly very small). Profound diseconomies
of scale in transaction costs make it difficult for large capital providers to
access these small stakeholders. In part, the capital takes the wrong form: the
mismatch in size is often coupled with a mismatch in investment time horizon.

Of course, competitive
markets have a way of evolving to capture profit opportunities. Thus, this
situation cannot persist. Over time the forces of competition will drive
innovations that connect capital to its best use. But it may take wholesale
structural failure before the bottlenecks that impede the flow of capital are
addressed.

The real question,
therefore, is: what can be done to catalyse this change?